Iron ore’s growing appeal

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Rising volumes, improved transparency and a strong connection to China have led financial investors to flock to iron ore. Julien Hall and S&P Dow Jones Indices’ Fiona Boal unpack a thriving and unique market

A familiar cast of actors consistently graces the commodities page of financial broadsheets: a handful of influential energy benchmarks, Chicago-traded grains, ICE-traded softs, LME base metals and a few other precious metals.

Grains in particular are likely to have been there for well over 100 years now. One may be forgiven for thinking that these tables of prices simply never change. But they do.

Once in a while, perhaps once every couple of decades, a new graduate joins that elite circle of globally-traded, globally-recognized commodities. After a decade of sharp market evolution, iron ore seems close to doing so.

The emergence of iron ore into broader recognition has been a rapid one by commodity market standards. Just 10 years ago, the magnetic red dirt was an opaque market with contract negotiations taking place annually in smoke-filled rooms in Japan and later China. The market now has not one but two liquid futures markets, on the Singapore Exchange (SGX) and Dalian Commodity Exchange (DCE), trading 1.2 times and 20 times seaborne market volumes, respectively.

But there appears to be a second wave of evolution on the horizon, as the commodity is increasingly talked about on the trading floors of global financial centers. So besides increased liquidity, what is driving this interest? What characteristics make iron ore appealing to investors who already have a broad suite of commodities in their portfolio? What is the iron ore physical market like, and what could its rapid financialization mean for existing players?

Investor lens: China proxy

Increasingly, there are opportunities for investors to utilize commodities in their portfolios as building blocks to express specific views of a particular market, event or risk factor. Single commodities, whether iron ore, gold or soybeans, can be useful to investors looking to express investment themes that are dependent on unique geopolitical, demographic, structural, climate and even health and disease factors.

The iron ore market has several characteristics that make it distinctive as an investable asset; supply is concentrated in a handful of geographic regions and held by a small number of players, and demand is dictated by one major end-user; China.

Both supply and demand are subject to shocks caused by geopolitical events, unforeseen natural disasters and policy decisions, as well as the actions of individual asset owners. With unique characteristics can come unique tactical investment opportunities for investors.

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